5 Things Hewlett-Packard Management Wants You to Know

When shares of Hewlett-Packard Company (NYSE: HPQ) initially fell around 1% after the company announced solid fiscal third-quarter results, it seemed evident the market was underwhelmed. However, Hewlett-Packard stock has climbed nearly 8% since then, thanks in part to optimistic comments from HP management during the subsequent earnings conference call.

So why are investors excited? Here are five things HP management wants you to know.

Personal Systems are leading the chargePersonal Systems is HP's single largest segment, representing $8.65 billion in last quarter's revenue, so a rebound in this segment is crucial for HP's turnaround. Here's what HP CEO Meg Whitman had to say:

In Personal Systems, we had an excellent performance, with revenue up 12% from the prior year period. This represents the third successive quarter of revenue growth for Personal Systems in a market that has stabilized but, nevertheless, continues to contract. We gained market share both year over year and sequentially, and we're seeing growth across all major categories. [...] We believe we can continue to gain share in PCs despite the challenges in this market as it consolidates.

For perspective, that 12% growth included 9% and 18% unit sales growth, respectively, in HP's desktops and notebooks. This, in turn, translated to an 8% bump in consumer revenue over the past year, and 14% growth over the same period in commercial sales. Going forward -- and given the ongoing contraction in the Personal Systems market -- it's also important to note that HP is achieving surprising growth by taking market share.

The IBM/Lenovo deal is helping HP's server businessMeanwhile, the only other segment to post year-over-year growth for HP was its Enterprise Group, revenue from which increased 2% year over year to $6.9 billion on strength in servers and networking. Whitman elaborated:

In industry standard servers, we saw 9% growth from the prior year period, which represents our fourth consecutive quarter of revenue growth, and we expect to take almost a point of share in the second calendar quarter. We're seeing good early traction with service providers as a result of our partnership with Foxconn to produce a line of cloud optimized servers, and we moved aggressively to take advantage of the uncertainty customers feel about the IBMLenovo transaction. In head-to-head fights with IBM for deals, we're seeing clear improvement in win rates. All this, while delivering stable growth margins.

Remember, IBM announced in January it had agreed to sell its industry standard server business to Beijing-based Lenovo. Since then, however, the deal had been slowed by regulatory scrutiny amid security concerns from both the U.S. and Chinese governments. And though IBM expressed optimism regarding the deal following its own quarterly release last month, HP was more than happy to capitalize on that uncertainty to bolster its own fortunes.

HP's Printing strategy shows promiseBut this doesn't mean HP is ignoring the rest of its businesses as they decline. Arguably the most important is Printing, which saw revenue fall around 4% year over year to $5.6 billion last quarter. And though that makes Printing significantly smaller than both Personal Systems and HP's Enterprise Group, it also boasts the company's second-highest segment operating margin, trailing only the 21.2% from HP's much smaller Software business. As a result, Printing was HP's only segment to achieve pre-tax earnings of more than $1 billion.

Here's what Whitman had to say:

Total [printer] hardware unit shipments declined 5% in the quarter. However, we gained share in both ink and multifunction printers, important categories where we now lead the market. As planned, our disciplined unit placement strategy resulted in declines in single function Mono and low-value home printers. But we're seeing continued momentum in focus areas like managed print services, where we had another strong quarter of signings. This is an important business for us, as it supports a strong aftermarket sales opportunity for supplies.

In short, HP is purposefully redirecting its energy toward the highest-value printing targets. This means some short-term pain on the top line, but it should drive solid results and improved profitability over the long run.

HP is still dedicated to returning cash to patient shareholdersIn the meantime,HP is intent on using much of its strong cash flow to reward shareholders for their patience. Last quarter, for example, it repurchased 17.5 million shares and paid $299 million in dividends, bringing its total cash returned to shareholders to roughly $881 million. Whitman offered this reminder:

[O]ur capital allocation strategy remains the same, and we have said that we'll return at least half of our cash flow to shareholders in the form of dividends and repurchases. And despite the fact we were not buying shares in the [calendar] third quarter, we intend to return to buying shares and we believe we'll meet that commitment by the time we get to the end of 2014.

For perspective, HP's free cash flow is expected to be roughly $9 billion for all 2014, which means at least $4.5 billion will have ended up back in shareholders' hands through dividends and share repurchases by the end of this year.

HP is ready to consider acquisitions -- with one caveatBut apart from shoring up its balance sheet, paying dividends, and repurchasing shares, what might HP do with the rest of its cash? Here's what Whitman thinks:

[N]ow that we have repaired the balance sheet, as I have said before, I do think M&A will be a part of our strategy. But let me assure you that this will be returns based. It will be focused on only things that we cannot do organically and given the choice, I would rather invest organically this is the heritage of Hewlett-Packard. We do core R&D better than anyone else.

Seems fair enough. With its strong cash flow and net cash position of $4.9 billion as it exited last quarter, HP certainly has some wiggle room to selectively acquire companies, which could help it shuffle for market share in high-growth areas. (Cloud computing, anyone?) But it would be hard to blame HP for finding that growth through R&D, especially if it means not having to traverse the messy process of integrating an acquired business.

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